Competing with Amazon on Amazon

Thousands of small merchants depend on Inc. AMZN -0.30% to reach customers who otherwise wouldn't know they exist. A few of them complain, though, that Amazon sometimes eats their lunch.

According to some small retailers, the Seattle-based giant appears to be increasingly using its Marketplace—where third-party retailers sell their wares on the site—as a vast laboratory to spot new products to sell, test sales of potential new goods, and exert more control over pricing.

Jeff Peterson, owner of Collectible Supplies Inc., a Garden Grove, Calif., retailer of sports merchandise, last summer began selling $29.99 Pillow Pets—stuffed-animal pillows modeled after NFL mascots—through Amazon's site. For several months, sales were relatively robust, with as many as 100 of the Pillow Pets a day.

Then just ahead of the holiday season late last year, Mr. Peterson noticed Amazon had itself begun offering the same Pillow Pets for the same price while giving the products featured placement on the site.

A Success Story

Kathy Wojtczak, owner of a jewelry boutique in Seattle, appears in an Amazon ad as one of many 'thriving' small businesses on the site. She says she hasn't had to compete with Amazon on products she carries.

Sales of Collectible Supplies' Pillow Pets soon fell to 20 a day "because Amazon was offering it," Mr. Peterson said. "I tried lowering the prices, but Amazon would always match my price or go lower until I eventually gave up" and set it at the manufacturer's suggested price, he added. Prices fluctuate, but Amazon was recently selling a Baltimore Ravens Pillow Pet for $12 with free shipping, while Mr. Peterson is again offering the product for $29.99.

"Amazon is a double-edged sword," said Thomas Frenchu, chief operating officer of Tabcom LLC, owner of, and others. "You have to deal with them, you have to be on their site, but we also have to fight harder and harder every day to compete with them."

For certain, small retailers are drawn to Amazon Marketplace by the promise of tapping into the Internet company's roughly 85 million unique monthly visitors, 45% greater than eBay Inc. EBAY -0.40% and nearly 7-fold more than Sears Holding Corp., S -0.48% both of which host their own third-party marketplaces, according to comScore data.

Amazon executives declined to discuss pricing or purchasing strategies. "All of our focus is on helping making sellers successful," said Peter Faricy, Amazon Marketplace vice president, who added the company has more than two million third-party sellers world-wide. "If we can identify hot products and make suggestions to them, we do that."

Michal Czerwonka for The Wall Street Journal

Some retailers say Amazon uses them as a test market. Above, Collectible Supplies' warehouse in California.

Sellers report an average 50% increase in sales when they join Amazon's marketplace and use its storage and shipping service, added Tom Taylor, vice president of fulfillment by Amazon, in an interview. He attributed that to lower-cost delivery and the quality of Amazon's customer service.

Hadi Irvani, director of e-commerce for Okabashi Brands Inc., a producer of flip-flops and other sandals, said he saw sales grow immediately after joining Amazon's marketplace in May 2010. The Buford, Ga., company now gets about 10% of its $3 million in online sales annually from Amazon and Mr. Irvani said he would likely use Amazon's fulfillment to help save as much as $100,000 in annual shipping costs. "It transformed our business to be on Amazon," said Mr. Irvani.

Amazon takes a commission for every marketplace sale—a 6% cut for personal computers, for instance, to as high as 15% for mobile phones and musical instruments—and charges larger sellers a monthly membership fee. Overall, the marketplace generates 9% to 12% of Amazon's total $48.1 billion in annual revenue, according to analyst estimates.

Third-party sellers increased their unit sales by 60% in the first quarter, compared with a year earlier, and such sales now represent 39% of Amazon's total, the company said.

Yet some sellers say they suspect Amazon uses sales data from outside merchants to make purchasing decisions in order to undercut them on price and give items featured placement under a given search, a prominent position on the page known as the "buy box."

"There are countless items that they (Amazon) didn't sell before that they sell now because of Marketplace," said Brad Howard, president of Las Vegas-based, which sells about $2 million annually of specialty men's items like Darth Vader cufflinks.

Amazon declined to comment beyond its earlier statement.

Mr. Howard said Amazon recently began selling a Rick Steves brand travel bag that he believed it identified as a strong seller through its marketplace retailers. "It happens fairly regularly that Amazon finds a new product to sell themselves and when they do it's pretty much impossible to compete," Mr. Howard said.

Amazon will often list in the buy box the cheapest item under a given search, unless the company offers it itself within 1% of the lowest offered price, sellers said. Mr. Howard estimates 90% of customers purchase what's in the buy box, rather than searching deeper within Amazon's site.

Amazon is willing to lose money on the sale of some products and can drive down prices by buying items in larger quantities than many competitors, says Piper Jaffray analyst Gene Munster. That, in turn, can force third-party retailers to lower their own prices.

Some of these issues are set to grow as third-party sellers become an increasing part of the Internet retailer's business. Within five years, third-party vendors could make up 55% of all Amazon unit sales, said Mr. Munster, up from 36% in 2011.

Some third-party sellers are already scaling back from selling on Amazon's marketplace. Melissa Van Flandern, co-founder of Seattle-based Tottini, said she's discouraged by Amazon's constant price changes and is putting less inventory on the marketplace.

"It was great in the beginning, we got our brand out there," said Ms. Van Flandern, whose baby products store generates about $500,000 in annual sales. But she pointed to a giraffe-shaped teething toy dubbed Sophie as one product Amazon capitalized on in the wake of third-party retailers. "We used to sell a ton of Sophies on Amazon," she said. "Not anymore." Tottini no longer lists the Sophie teething toy on Amazon.

17,000+ Members

213 Chapters

60+ Countries

Stay Connected

Fill out the contact information below to receive EO's newsletter.

    Conditions of EO Membership Application and Renewal:
    Every member who applies or renews their membership agrees to comply with the Policies and Procedures, Bylaws and Code of Conduct of Entrepreneurs' Organization. Current members must complete the online renewal form acknowledging review of the organization's Policies and Procedures, Bylaws and Code of Conduct.